Russia Watch: CPI surprise peak in May makes bolder 50bp rate hike more likely

According to Rosstat, the CPI surged to 6.0% yoy in May. This estimate even exceeded the figure based on weekly data (5.9% yoy), becoming 2021's peak so far. On Friday, the CBR will certainly proceed with a key rate hike, with 25bp still on the table but 50bp not to be ruled out.

Food and Non-Food CPI in upward trend, while services more stable (% yoy)
Rosstat, RBI/Raiffeisen Research

One of the key factors for the rise in inflation came from fruits and vegetables prices (+8.2% yoy). Generally, the food and non-food product inflation picked up pace (7.4% and 6.7% yoy, respectively), while in services the price growth remained at 3.3% yoy.

There are several drivers behind the increased CPI level. Firstly, the upward trend in global prices for metals, soft commodities, etc. Secondly, a rather strong consumer demand (consumer lending added 11.4% yoy in April after 7.6% yoy in March). Thirdly, international travel is still limited: in 2020, RUB 1.85 tn (3.5% of household consumption) could have been spent abroad but was used for local consumption and savings. Altogether, the above factors resulted in a recovery on the demand side overtaking the supply recovery.

The unexpectedly high May inflation figure increases the probability of 50bp hike in the key rate by the Central Bank of Russia (CBR) this friday. However, a 25bp hike is still on the table as well since a certain stabilisation on the geopolitical front and the initial intention of the regulator to steer the monetary policy smoothly. We expect CPI to stabilise at the current level until the end of summer due to the lagged impact of the previous hikes. In our base case, we do not expect the CBR to overreact and push the key rate over the upper bound of the neutral range (5-6%) until YE2021.